Long-Term Investing in Emerging Markets

Emerging-market (EM) stocks have been central to global equity allocations since the 1980s and outperformed their counterparts in the developed markets (DM) in the years leading up to the 2008 global financial crisis (GFC). Since 2009, however, the opposite has been true, with EM underperforming DM by almost 5% annually. Certain EM stocks, however, have bucked this trend. Drawing on nearly 30 years of index- and stock-level returns, and leveraging a new MSCI equity factor model, we identified shared fundamental attributes — profitability, stable cash flows and disciplined capital allocation — of these “long-term compounders.”

Additionally, we found a disconnect between topline economic growth and per-share returns. Despite a rising share of global GDP and a larger universe of listed securities, EM stocks’ underperformance after the GFC has been largely attributable to persistent share dilution and sagging profitability.

Our findings suggest opportunities for investors. Because analyst coverage is lower for EM stocks, active and fundamental managers have the potential to uncover mispriced compounders based on key fundamental metrics. Managers of systematic or index-based strategies may consider tilting toward profitability, high dividend yield, modest dilution and stable earnings.

Dividend yield, investment quality, profitability and low earnings variability were most associated with compounder stocks

Exposures are based on the MSCI EMEFM. End-of-month exposures are averaged from Dec. 31, 1996, to Dec. 31, 2008, and from Jan. 31, 2009, to Dec. 31, 2024. Exposures are the quintile spread, where quintiles are based on return contributions. The regional universes are represented from left to right by the MSCI Emerging Markets, MSCI Emerging Markets ex China and MSCI Emerging Markets Small Cap Indexes, respectively.